Among the many races the pandemic has accelerated, none is so pointless as the issuance of central-bank digital currencies. The Canadian government, which should know better, has jumped into the fray despite earlier opposition. Reversing comments made in February 2020, Bank of Canada deputy governor Timothy Lane now believes state involvement in cryptocurrencies is a pressing matter. Along with its G7 partners, Canada has been exploring central-bank digital currencies since 2017 but the race suddenly sped up in mid-October. Central banks should stay clear of cryptocurrencies – Canadian Investor
A few years ago, I saw a number of Black Americans on Facebook touting bitcoin as the path to wealth. What bothered me that in all the hype being expressed that there was nary a discussion on what currency actual meant. No discussion as to the economics. No discussion as to the political-economic philosophy that undergirds a currency. 2017 saw the bitcoin bubble burst and the chit chat by those same Black Americans faded away like the unrealized gains they promoted.
Bitcoin and other cryptocurrencies have been touted by some proponents as the way to introduce underbanked or unbanked minorities into the credit system. Some Black Americans may have bought into this although the leading Black advocate organizations i.e. National Urban League, NAACP, Color of Change, Multicultural Media, Telecom, and Internet Council, to name a few, have been relatively silent on the benefits of crypto as a banking and payment system. No surprise their since when it comes to technology, Blacks have consistently taken a consumer position versus a producer position. And given that these legacy organizations are lead by the older generation, leadership’s inability to wrap its head around the true underlying economic benefits of cryptocurrency is a direct result of leadership being out of step with technology overall and how technology lies at the core of America’s economic exceptionalism.
In addition to consumerism, Black Americans still emphasize allegiance to the American political economy instead of a more skeptic, independent view of it. Again, its current leadership emphasizes inclusion and diversity as benefits without discussing its costs: that not everyone will benefit from such an approach. A truly inclusive approach to the political economy would be one where Black Americans view themselves not as a community, but as a nation within an American confederation. The advantage of that approach, a national approach, would require that Black Americans re-evaluate the meaning of economic value and the technology or mechanisms for capturing, storing, expressing, and transporting that economic value, particularly in a digital age. Cryptocurrency can be a vehicle for capturing, storing, expressing, and transporting Black economic value.
The upfront work will be the hardest, that being to identify and “mine” that value and quantifying it into a digital asset like cryptocurrency. But by doing so, by tying it to a Black economic engine, Black Americans can provide a blueprint for moving cryptocurrency from merely a speculative commodity to a true currency that can be used in the mainstream to buy and sell any and all goods. Unless crypto can demonstrate its utility in trade, then Nouriel Roubini’s description of cryptocurrency as shit coins will take hold as truly appropriate by most observers. Creating that value means taking a “nationhood” approach. It means connecting all productive assets within Black America to its current banking assets, identifying the economic value within Black America, issuing coin based on that value, ane getting members of its community to buy off on that value.
There are legal and regulatory hurdles, but the biggest hurdle will be cultural and societal. Black Americans will have to take a more courageous approach to Black economic viability and sustainability. The current political-economic structure has failed them and it will be up to Blacks on their own to reimagine the production and distribution of economic value within their communities.
An article today in Bloomberg discussing how a Biden administration would address the regulation of cryptocurrency has me putting myself in the place of the regulator. What is the U.S. Securities and Exchange Commission’s world view of digital assets? How will the Commodity Futures Trading Commission’s view toward regulation of exchanges evolve? Will the Board of Governors of the Federal Reserve System view the payment system aspect of cryptocurrency as a threat to the current national and global payment system regime or as a welcome supplement that brings more efficiency and transparency?
Clarity on what may happen on the regulatory side of cryptocurrency requires that the trader first take a top-down view of how governments view the world and especially how they view markets. You will never hear a regulator utter the term “free markets.” That phrase is best suited for the rhetoric of politicians who inherit worn out campaign slogans and reboot them for the latest run for office. I doubt they themselves, a significant number of whom are not trained in economics, truly understand what a market is or can likely identify threats to it. Compound markets for digital assets with the mechanics of payment systems and the politician’s eyes glaze over and she falls back to what she knows best: sloganeering tainted with tropes that appeal to individualism, consumerism, collectivism, or whatever narrative they believe their constituency will buy into.
The professional regulator, on the other hand, uses law and regulatory code as a front or an excuse. Statutes and codes give the professional regulator cover for their underlying philosophy and narrative. Unlike the elected official who only spends minutes on issues of markets and their regulation, the professional regulator is the expert spending years developing her own philosophy and transitive narrative and reconciling that philosophy and narrative with at times archaic statutes that the elected official has dumped on her to interpret. With archaic statutes and codes as cover for the regulator, it is the trader’s task not only to generate returns from holding a digital asset but to best understand what that regulator’s philosophy is.
There are two types of regulator. One I term as the myopic regulator. This regulator focuses on the black letter of the law and the code. Their focus is primarily on whether the market participants are following the rules on the books. He does not take into consideration any wider view of the philosophy behind markets and regulation. If the rules are skewed more to trader protection, his interest will be in outcomes that favor trader protection. If the rules skew more toward brokerage or platform protection, the regulator’s interest will be in outcomes favoring platform protection.
On the other side is what I term the universal regulator. They have managed to synthesize the role of government, traders, and platforms. They have an interest in maintaining the viability of the market system. Government’s role, in their view, is to provide for an efficient and productive trading post where there is sufficient transparency between traders and where the exchange platform ensures speed, efficiency, and clarity of trade because without these characteristics, the American markets as a whole become less viable, less reliable. Government will expand or contract in order to meet its universal role.
The trader should be mindful of this regulatory environment, particularly the tug-of-war between more or less regulation of exchanges. Eventually the trader pays the price in terms of transparency, price fairness, and the level of fees, especially where trade is her primary means of livelihood and income. After all, trade boils down to an information game and staying informed on government actions as well as on how government itself can disrupt information flow is important to the trader’s success.
SEC Issues Statement and Requests Comment Regarding the Custody of Digital Asset Securities by Special Purpose Broker-Dealers
Washington D.C., Dec. 23, 2020 —
The Securities and Exchange Commission today issued a statement and request for comment regarding the custody of digital asset securities by broker-dealers in order to encourage innovation around the application of Securities Exchange Act Rule 15c3-3 to digital asset securities.
The statement sets forth the Commission’s position that, for a period of five years, a broker-dealer operating under the circumstances set forth in the statement will not be subject to a Commission enforcement action on the basis that the broker-dealer deems itself to have obtained and maintained physical possession or control of customer fully paid and excess margin digital asset securities for the purposes of paragraph (b)(1) of Rule 15c3-3. These circumstances, among other things, include that the broker-dealer limits its business to digital asset securities, establishes and implements policies and procedures reasonably designed to mitigate the risks associated with conducting a business in digital asset securities, and provides customers with certain disclosures regarding the risks of engaging in transactions involving digital asset securities.
In addition, the Commission is requesting comment to provide the Commission and its staff with an opportunity to gain additional insight into the evolving standards and best practices with respect to custody of digital asset securities. Such insights will serve to inform any potential future Commission action in this space.
The Commission statement and request for comment are published on the Commission’s website and will become effective 60 days after publication in the Federal Register. The Commission welcomes engagement from interested parties on these issues.
How not to treat forex traders: CFTC wins order of restitution against Winston Reed Investments
December 22, 2020
Washington, D.C. — The Commodity Futures Trading Commission today announced that Judge Max O. Cogburn Jr., of the U.S. District Court for the Western District of North Carolina, entered a consent order against Mark N. Pyatt, of North Carolina,imposing a permanent injunction and ordering Pyatt to make restitution in the amount of $255,850. The order also permanently bans Pyatt from registering with the CFTC and from trading commodity futures and retail foreign exchange contracts (forex). In the order, Pyatt admitted to fraudulently soliciting individuals to place funds in a commodity pool and to misappropriating most of the funds he solicited.
The consent order resolves a CFTC case against Pyatt that was filed in the Western District of North Carolina on February 10, 2020. [See CFTC Press Release No. 8120-20] The CFTC’s litigation continues against Pyatt’s company, Winston Reed Investments LLC.
The consent order finds that from at least April 2017 to February 2019, Pyatt accepted $276,850 from pool participants to trade commodity futures and forex. The consent order also finds that Pyatt misappropriated most of pool participants’ funds for business expenses and personal use, and to make Ponzi-like payments to other pool participants, while using only a fraction of the funds to trade. In addition, despite overall net trading losses, Pyatt sent reports to investors claiming profits of between 18.8 percent to 86.5 percent per month.
Related Criminal Action
In a parallel criminal action, the U.S. Attorney for the Western District of North Carolina announced that Pyatt pleaded guilty to wire fraud in connection with the scheme. On October 27, 2020, Pyatt was sentenced to 37 months in federal prison and ordered to pay restitution to his victims. [See United States v. Mark Nicholas Pyatt, Case No. 1:20-cr-00016, ECF No. 42 (W.D.N.C. Nov. 5, 2020)]
The CFTC cautions that orders requiring repayment of funds to victims may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.
The CFTC appreciates the cooperation and assistance of the U.S. Attorney’s Office for the Western District of North Carolina in this matter.
The Division of Enforcement staff members responsible for this case are Michael Loconte, James A. Garcia, Erica Bodin, and Rick Glaser.
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CFTC’s Foreign Currency (Forex) Fraud Advisory
The CFTC has issued several customer protection fraud advisories, including the Forex Fraud Advisory, which provides information about a type of fraud involving the trading of foreign currencies and how customers can detect, avoid, and report these scams.
Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.
The Securities and Exchange Commission announced today that it has filed an action against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.
According to the SEC’s complaint, Ripple; Christian Larsen, the company’s co-founder, executive chairman of its board, and former CEO; and Bradley Garlinghouse, the company’s current CEO, raised capital to finance the company’s business. The complaint alleges that Ripple raised funds, beginning in 2013, through the sale of digital assets known as XRP in an unregistered securities offering to investors in the U.S. and worldwide. Ripple also allegedly distributed billions of XRP in exchange for non-cash consideration, such as labor and market-making services. According to the complaint, in addition to structuring and promoting the XRP sales used to finance the company’s business, Larsen and Garlinghouse also effected personal unregistered sales of XRP totaling approximately $600 million. The complaint alleges that the defendants failed to register their offers and sales of XRP or satisfy any exemption from registration, in violation of the registration provisions of the federal securities laws.
“Issuers seeking the benefits of a public offering, including access to retail investors, broad distribution and a secondary trading market, must comply with the federal securities laws that require registration of offerings unless an exemption from registration applies,” said Stephanie Avakian, Director of the SEC’s Enforcement Division. “We allege that Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple’s business and other important long-standing protections that are fundamental to our robust public market system.”
“The registration requirements are designed to ensure that potential investors – including, importantly, retail investors – receive important information about an issuer’s business operations and financial condition,” said Marc P. Berger, Deputy Director of the SEC’s Enforcement Division. “Here, we allege that Ripple and its executives failed over a period of years to satisfy these core investor protection provisions, and as a result investors lacked information to which they were entitled.”
The SEC’s complaint, filed today in federal district court in Manhattan, charges defendants with violating the registration provisions of the Securities Act of 1933, and seeks injunctive relief, disgorgement with prejudgment interest, and civil penalties.
The SEC’s investigation was conducted by Daphna A. Waxman, Jon A. Daniels, and John O. Enright of the SEC’s Cyber Unit. The case is being supervised by Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit. The SEC’s litigation will be conducted by Jorge G. Tenreiro, Dugan Bliss, Ms. Waxman, and Mr. Daniels, and supervised by Preethi Krishnamurthy.
Brexit talks are being described as “difficult” as the United Kingdom continues discussions with the European Union over their trading relationship. Bloomberg reported that talks would resume between the European Union and the United Kingdom on Monday. The two major issues dogging the talks are access to fishing waters and subsidies for businesses.
Reuters reports that both chambers of Congress have reached agreement on a bill to provide relief for the ill effects of the pandemic. The bill calls for $900 billion in relief spending. The bill provides for $600 in direct payments to individuals and an additional $300 a week in unemployment payments.